This archived content originally appeared at Freebanking.org, the predecessor site to Alt-M.org, and does not carry the sponsorship of the Cato Institute.

Good deflation and good inflation

A couple of weeks ago, Scott Sumner pointed out that many conservative-leaning economists think that certain types of deflation can be good. The same economists, though, are typically reluctant to acknowledge that by a similar argument, certain types of inflation can be good.

As Sumner points out, there are economists who understand that the argument is symmetrical. He mentions George Selgin. Selgin’s 1997 monograph Less Than Zero: The Case for a Falling Price Level in a Growing Economy implies in its title that in a shrinking economy there may be a case for a rising price level. Selgin in fact discusses the case for such "good inflation" on page 39 of the monograph, although his main focus is on "good deflation" because at the time he wrote, it was a more unusual idea. Selgin, and fellow blogger on this site Steve Horwitz, make remarks in Sumner’s comment section.

Selgin stated his arguments in a way to give them textbook simplicity for ease of understanding. In an actual free banking system, the details of the system might add some wrinkles that would require changes to the  form is arguments while preserving their spirit. Expectations about the supply of the monetary base and thus the path of prices over time might differ considerably depending on whether the monetary standard was gold, silver, a frozen fiat monetary base, a commodity basket, or something else. Under some standards, inflation and deflation might be relative to average expectations for the price level rather than absolute. It remains an open question to me whether a standard in which the monetary base was shrinking and expected to continue shrinking (as was the case in some earlier eras with the supplies of gold, silver, and copper) would be compatible with the monetary system attaining the "full information" ideal of not being a disturbing factor to trade.

Avatar